Supreme Court Rules Severance Pay Can Be Taxed

The Supreme Court ruled in favor of the Obama administration in a dispute over taxes on severance compensation, issuing a decision that may block more than $1 billion in refund claims.

The justices today unanimously rejected a $1 million refund bid by Quality Stores Inc., once the country’s largest agricultural specialty retailer. The high court said severance payments the company made to 3,100 people were subject to tax under the Federal Insurance Contributions Act.

The issue grew in importance in recent years with the layoffs that have accompanied the economic slowdown. The administration has been fighting more than 2,400 refund claims.

Writing for the court, Justice Anthony Kennedy said the law, known as FICA, defines “wages” broadly to include compensation for services of any type. FICA uses payroll taxes to finance Social Security and part of the Medicare health-care program for the elderly and disabled.

Quality Stores, which had sales of $1.1 billion in 2000, closed more than 300 stores in 2001 and 2002 and fired its remaining employees.

The company, which was based in Muskegon, Mich., paid the disputed taxes and then sought a refund. Some of that money would have gone to 1,850 ex-employees who paid their share of the FICA tax and authorized Quality Stores to seek refunds on their behalf.

Employers and employees each pay 6.2 percent in Social Security taxes on wages up to a cap, which is $113,700 this year. Employers and employees each pay 1.45 percent of all wages toward Medicare; high-income taxpayers are subject to additional payroll levies.